Royal Highland: Speculation wrecking commodity markets

Agricultural commodity markets have replaced mortgages as the financial plaything of choice for traders looking to make a “fast buck”, but speculation is wreaking damage on agricultural commodities markets and NFU Scotland wants to see greater regulation to stamp out abuse and manipulation.

Union president Nigel Miller said he was “deeply alarmed” that the greatest proportion of activity in futures markets no longer involved those in the supply chain.

“Food commodities are too important to be played about with by day traders and speculators,” he told a briefing at the Royal Highland Show at Ingliston near Edinburgh. “Both the developed and the developing world are feeling the impact.”

An example of growing speculation were the volumes traded on the Chicago wheat futures markets, which were some forty-six times the actual amount of wheat that the world produces in a year.

“Agricultural commodities – such as wheat – are inherently unstable and financial tools that allow those in the food supply chain to hedge their risk and plan forward are an increasingly important element in managing the market,” said the NFU Scotland president.

“The way the futures market operates should be about the industry having the ability to manage itself. Instead, it is a system open to third parties who often have little interest in managing the long-term risks associated with producing food, but have every interest in short-term financial gain.

“The unwelcome entry of significant financial resources into the futures markets has brought increased volatility to markets and contributed to price spikes. To combat this, there is a need for greater structure to be given to the futures markets so that they do the job intended, which was to allow those in the food supply chain to hedge their risk and plan forward.”

Mr Miller said lessons should be learned from the last few years, which had highlighted the danger of not enough regulation of individuals and institutions in the financial markets.

He added: “We will join others in working towards improved regulation for commodity financial markets. There is no harmonised regulation for these and, astonishingly, they lack a basic set of rules governing market abuses and price manipulations in some cases. We also welcome the efforts that are underway to define a common set of rules for both commodity and financial markets.

“At the same time, we have an opportunity to make sure that more transparent market information is made available to all to allow all parts of the food supply chain to better plan and manage their production.”